Procurement Operating Model for the Mining Industry
Creating a more resilient and responsive procurement function to achieve high performance in times of high volatility in commodity prices.
When embarking on a journey to future-proof the procurement function, the most critical decision a company faces is defining an operating model that is, at the same time will be efficient and effective, and also contributes to the overall business strategy.
How do you decide which operating model will work best for your business? Will the business use a centralized or decentralized procurement? Or maybe a hybrid of the two?
Centralized – Centralized procurement involves having a central location within an organization in order to carry out the purchasing of goods and services on behalf of the organization, rather than various functions undertaking such activities across the organization.
Decentralized – Decentralized procurement refers to each business unit within an organization working independently in order to carry out the purchasing of goods and services on behalf of their own business unit, rather than having the authority to undertake such activities across the organization as a whole.
Read about Future Proofing Procurement in Mining >
Pros and Cons of the Centralized and Decentralized Procurement Operating Model
The Hybrid Procurement Operating Model
While centralization looks to be the best option, mining companies have to take into consideration the along with other influencing factors, the social license to operate1. Therefore, committing solely to a centralized or decentralized model would be ineffective. The ideal procurement operating model, in this case is a hybrid which would incorporate the best of both models.
The hybrid procurement operating model incorporates a central leadership structure, while giving local procurement some degree of autonomy to approach local suppliers. Helping to mitigate the risk of social licence to operate, and supporting operation-specific decisions without delay; while achieving the benefits of centralization for the most relevant categories.
Procurement Organization Operating Models
In order for the hybrid operating model to work and be accepted within the company, the Procurement Organization must deliver value beyond shared efficiency and operating cost improvements. Such benefits includes the following:
• Better Spend, Supplier and Market Insights
• Improved Contract Compliance
• Increased Bottom Line Savings
• Better Sourcing and Buying Performance
• Decrease Risk due to Social Licence to Operate
Implementing the Hybrid Procurement Operating Model
A critical gateway to the hybrid procurement operating model is defining which procurement instance is responsible for each process. Procurement service center or local procurement? While various factors go in to this decision making, Figure 3 shows a typical responsibility assignment for a mining company with multiple sites within the same geography, aiming to achieve all 5 benefits.
Procurement Organization Operating Models
In this example the Procurement Service Center exclusively executes Procurement day-to-day Operations, Strategy, Performance Management, Master Data, and Talent Management. Local procurement is responsible for execution of site Requisitioning and Purchasing Plan, Spot Buy Execution and Contract Implementation.
Therefore, the responsibility for Category Management and Strategic Sourcing are assigned on a per category basis. Deciding where the responsibility and governance fore each category lies is another critical gateway to implementing the hybrid operating model. To tackle this obligation, Dourado Consulting has created the Category Responsibility Assignment Matrix, which analyses two dimensions for each category in a quantitative way. Procurement Influence and Spend Control.
Read about What is Spend Assessment? >
Category Responsibility Assignment Matrix
Each of the dimensions is expressed as an axis that represents a continuum of possibilities ranging between two endpoints.
Dimensions of the Category Responsibility Assignment Matrix
Procurement Influence: Dourado Consulting analyses 6 elements to establish how well positioned the procurement function is to involve end-users and the market, obtaining a value for Procurement Influence.
1. Common specification across sites
2. Demand planning
3. Contracting complexity
4. Category market expertise
5. Process integration
6. Talent.
Spend Control: Dourado Consulting analyses 4 elements to establish the level of control and coordination procurement has when engaging with the market.
1. Supplier profile
2. Size of deal
3. Business risks / impacts
4. Stakeholder – Supplier relationship profile.
Once crossed, these axes create the Category Responsibility Assignment Matrix.
Using the Category Responsibility Assignment Matrix
Consider some of the goods and services a mining operation would need to function efficiently: explosives, grinding balls, employee transportation, catering, and small construction on-site. Under the hybrid procurement model, where would responsibility fall? For each category, the result plotted along the two axes indicates if responsibility lies with the Centralized or Local function.
Illustrative example of analysis of categories using the Category Responsibility Assignment Matrix
From the matrix, we can see that different categories would fall under different mandates. Helping to drive expected benefits throughout the company and support design decisions around the procurement organization and service models.
Usually, the categories present themselves in clusters, facilitating the decision of which procurement office has governance over a category.
Final Considerations
Mining is complex, with unique risks and considerations. Considering that a one-size-fits-all answer to the operating model question does not exist; how does one develop the ideal operating model design?
Dourado Consulting approaches this challenge by customizing the Category Responsibility Assignment Matrix considering the organization’s vision and current capabilities. Resulting in a fact-based category responsibility assignment that supports the detailed design of the operating model.
Reference – 1. Social licence to operate is the relationships between mining companies, and local stakeholders and broader civil society regarding demands and expectations for how a business will operate.
It was voted by mining executives as the #1 business risk facing their companies – EY Mining & Metals Top 10 business risks and opportunities 2020
If you are looking to learn more, contact us
+1 647 936 1458
rafael@douradoconsulting.com
About us
Dourado Consulting is a Strategy Consulting Firm specialized in Procurement.
Dourado Consulting is committed to working together with you, our clients, in order to fully understand your needs, create a personalized approach exclusively made to tackle your unique situation.
We are committed to delivering actionable insights that are pragmatic and sustainable in the long-term.
Our capabilities include:
- Procurement Merger Due Diligence
- Procurement Post Merger Integration
- Procurement Transformation
- Operating Model Design
- Category Excellence
